Monday 10 June 2013 11.14 EDT
First published on Monday 10 June 2013 11.14 EDT

Europe's most powerful central bankers are to clash in Germany on Tuesday when the country's supreme court scrutinises the legality of the key instrument deployed by Mario Draghi, the head of the European Central Bank, to stabilise the battered single currency.

The case at the constitutional court in Karlsruhe pits Germany's Bundesbank against the ECB in a dispute over whether Draghi's promise last year of unlimited intervention in the financial markets to save the euro was legal.

Jens Weidmann, head of the Bundesbank, will argue strongly that Draghi's move was illegal as it was tantamount to the direct financing of governments, proscribed under the ECB's statutes.

Joerg Asmussen, the German on the ECB board who used to work closely with Weidmann in the Merkel coalition in Berlin, will present the case for Draghi, contending that the policy was necessary to guarantee the euro's stability and thus fulfil the ECB's primary obligation, ensuring monetary stability in the eurozone.

Draghi pledged last summer that the ECB would do "whatever it takes" to safeguard the euro, and in September he announced a radical new policy known as outright monetary transactions (OMT), under which the ECB could act to save the currency by buying up the bonds of a eurozone government at risk of financial collapse.

The policy shift was widely seen as the most effective weapon deployed in three years of the eurozone crisis.

"The ECB is not on trial," Asmussen told Germany's Bild newspaper on Monday, warning that there would be "substantial consequences if the purchase programme was rescinded".

The Bundesbank and the ECB have been at daggers drawn over the role of central banks in the crisis for more than a year, with Weidmann taking the unusual step of dissenting in sessions of the ECB governing council on policy moves.

A whispering campaign has been waged in recent weeks on both sides of the Frankfurt divide, with ECB sources muttering privately about the Bundesbank being home to "opponents of the euro".

Indirectly criticising the way that eurozone leaders and governments have tackled the turmoil of recent years, Asmussen said the ECB was the sole EU institution with any credibility and clout, and Draghi's moves had calmed the markets and thus ensured the euro's survival and secured price stability.

He noted that last summer, as Italy and Spain teetered on the brink of financial chaos, "the euro was close to collapse".

Monetary policy purists at the Bundesbank argue by contrast that the ECB has vastly exceeded its remit in offering to wade into the markets to protect the euro.

Launched last September, the "big bazooka" of OMT has not yet been used. Draghi set strict conditions on its use and limited its duration to a maximum of three years. Any country benefiting would need to sign up to a programme of fiscal and economic rigour, as in the eurozone's bailouts.

It is not clear what the German court, which is not expected to rule finally on the dispute until after general elections in September, can do to stop the ECB as it does not have jurisdiction over the non-German institution.

Although it is not viewed as likely, the court would be able to tie the hands of the German government and the Bundesbank or curb its involvement in the ECB policy. Or it could send the dispute to the European court of justice.